U.S. prime money fund assets shrink again before new rules

NEW YORK (Reuters) - Assets of U.S. prime money market funds fell further in the latest week in advance of the final phase of reform for the money fund industry, which takes effect on Friday, the Money Fund Report said on Wednesday.

To win exemption from the new Securities and Exchange Commission rules, a number of institutional prime money funds have converted to funds that own only U.S. government securities.

These rules, on share value and fees, are the final phase of domestic money fund reform that is intended to safeguard a sector rattled by the collapse of Lehman Brothers in September 2008 during the global credit crunch.

Money in institutional prime funds, which can invest in riskier securities in addition to government debt, declined by $57.84 billion to $165.49 billion in the week ended Oct. 11.

In the prior week, their assets fell by $122.30 billion, the largest single-week drop since Reserve Primary Fund's share value fell below $1 or "broke the buck" shortly after Lehman's demise.

Under the upcoming SEC rules, institutional prime funds must allow their share price to "float" from $1 and/or impose fees and limit redemptions during times of market turbulence like that experienced during the financial crisis.

Corporate treasurers and cash investors are said to dislike these new features since they have used prime money funds as alternatives to bank accounts.

Short-term corporate borrowing costs have risen with the contraction of institutional prime funds. These funds had been major buyers of commercial paper and other short-term debt from banks and other corporations, which use proceeds to fund trades or finance payrolls and inventories.

The Federal Reserve has taken notice of higher borrowing costs resulting from the conversion of prime money funds.

"Anticipation of the impending deadline for compliance with MMF (money market fund) reform measures continued to prompt net outflows from prime MMFs and put upward pressure on some term money market rates," the Fed minutes on its Sept 20-21 meeting released on Wednesday showed.

Institutional government-only funds took in $42.82 billion, raising their total assets to $1.549 trillion in the latest week.

Since October 2015, institutional investors and fund managers have shifted about $1 trillion of assets into government-only funds from prime funds.

In the latest week, overall fund assets decreased by $18.83 billion to $2.604 trillion, according to the report, published by iMoneyNet.

(Reporting by Richard Leong; Eiting by Steve Orlofsky)

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